Barnes & Noble Forms New eBook Subsidiary With $300 Million From Microsoft

While the rise of eBooks has been centered around Amazon’s Kindle devices and the Apple iPad, the NOOK from the last big-box book seller Barnes & Noble has remained a noble, if distant, competitor. Now, B&N has announced that it has formed a strategic partnership with Microsoft, forming a subsidiary company comprised of its digital and college businesses combined with $300 million from the software giant.

According to B&N, the new subsidiary company will be referred to for the time being as “Newco” and is valued at around $1.7 billion. For their investment, Microsoft will take 17.6% equity share in the company while B&N retains the other 82.4%.

Not surprisingly, the first order of business for Newco will be to bring B&N’s digital content to Windows 8. Microsoft is pushing its mobile devices pretty hard, but lacks a strong content base. Meanwhile, its primary competitors — Apple, Amazon, and Google — already have established marketplaces for movies, books, and music. Rather than re-invent the wheel, Microsoft seems to be shortcutting by throwing money into B&N’s plan.

There are a few strange aspects to this partnership. For one, the NOOK is currently built on a forked version of Google’s Android mobile OS. Given that Microsoft has a large stake in Newco, this makes their relationship seem a bit awkward. However, it could herald the coming of a non-Android NOOK, but that’s pure speculation.

For another, the B&N’s press release mentions that Microsoft’s involvement hinged upon the two companies settling some patent litigation issues. From the press release:

Barnes & Noble and Microsoft have settled their patent litigation, and moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products. This paves the way for both companies to collaborate and reach a broader set of customers.

Nothing like settling a lawsuit to form the foundations of a lasting business relationship.

Interestingly, the press release also notes that a study into how Newco could be spun off into its own company. Again, from the press release:

On January 5, Barnes & Noble announced that it was exploring the strategic separation of its digital business in order to maximize shareholder value. Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses. The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made.

Spinning off the NOOK, digital distribution, and college businesses would be an odd move for B&N. Especially since one of the selling points B&N has pushed with the NOOK was special kiosks in every brick and mortar stores for free NOOK servicing. Leveraging their physical presence was a smart move by B&N, and one wonders how well the NOOK would fare without that kind of assurance. People are, after all, probably more used to dealing with B&N in person than, say, Amazon.

Where the deal will take the two companies is unclear at the moment, but it does signal that neither Microsoft nor Barnes & Noble are interested in throwing in the towel just yet. It may be a long way to the top of the tablet and eReader market, but there’s ample room to grow in third place.